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Dynamic Credit Portfolio Management: Linking credit risk systems, securitization and standardised credit indices

by Joćo Garcia of Dexia Group,
Serge Goossens of Dexia Bank, and
Jeroen Lamoot of Banking, Finance and Insurance Commission, CBFA

January 31, 2008

Abstract: In this paper we give a resume of the correlation concept that underlies the models for credit risk measurement, for the rating of structured products, for the pricing of (tranches of) structured products, and for the Basel II capital charges. We discuss how securitization has changed the risk characteristics of the credit portfolios and enter into the requirement of transparent and liquid credit indices for the credit portfolio management and for the further development of the securitization market. To capture the evolution in the financial and economic environment (for instance, reflected in the changing risk characteristics) we formulate the basis concepts of a dynamic credit portfolio management framework, that would build further on the common static Rating Based risk methods.

JEL Classification: O33.

Keywords: Dynamic Portfolio Management, Standardised Credit Indices, CDO, Securitization, Credit Risk, Credit Crunch, Economic Capital.

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Related reading: Wiping the Smile Off Your Base (Correlation Curve).